The SIP mode of investments in mutual funds increasingly gained acceptance among retail investors over the past few years. Driven by record inflows into Systematic Investment Plans (SIPs), the overall mutual funds industry's assets under management (AUM) jumped to nearly Rs 37 lakh crore in September, registering an over 33 per cent growth compared to the year-ago period, according to Amfi data.

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The overall Assets Under Management (AUM) touched Rs 36.74 lakh crore last month, up from Rs 27.6 lakh crore in September 2020, the data from the Association of Mutual Funds (Amfi) showed on Friday. Amfi CEO N S Venkatesh attributed the record AUM to the record inflows into the SIPs which crossed the Rs 10,000-crore milestone for the first time.

The number of SIP accounts grew from 4,32,44,048 in August to 4,48,97,602 in September while the SIP assets rose from Rs 9,923.15 crore in August to Rs 10,351.33 crore last month. The overall SIP assets climbed to Rs 5,44,976 crore in September from Rs 5,26,883 crore in August.

But, the lack of product knowledge, particularly among new investors, can result in sub-optimal investment decisions. Sahil Arora – Senior Director, Paisabazaar.com shares his knowledge on what dos and don’ts needs to be followed when investing through SIP in mutual funds:-

"DOs

Compare investment strategies and objectives of funds during fund selection- All mutual funds schemes disclose their broad investment objectives, strategies, fund management style and asset allocation strategy. Reviewing this information before investing through SIPs can help assess whether the funds will match your financial goals, investment horizon and risk appetite. You can find the funds’ investment objectives and strategies in their product literature, leaflets, Scheme Information Document (SID) and Key Investment Memorandum (KIM)."
 
Opt for growth plan over dividend plan
 
Many retail investors opt for dividend option while investing through SIPs assuming that dividends declared by mutual funds are an additional source of income. However, mutual fund dividends are paid from the investors own fund’s AUM. As a result, the NAV of a dividend declaring mutual fund drops by the dividend amount after its dividend record date. Moreover, the dividend amount is calculated on the basis of funds’ face value and not on their NAVs. This option is also less tax efficient vis-à-vis growth option as dividends received by mutual fund investors are taxed as per the income tax slabs. 

Opt for the growth option, both due to its higher tax efficiency and growth derived owing to the power of compounding.
 
Diversify your investments
 
Investors often invest their entire monthly surpluses in just one or two mutual fund schemes, which have delivered exceptional returns in the recent past. However, doing so would concentrate market risk for the investor to just one or two fund management teams. Your mutual fund portfolio may underperform broader market for a long time period in case the fund management team of your selected fund makes a wrong investment decision or the underlying investment strategy, sector or theme of your fund goes through unfavourable market conditions. 

Thus, instead of placing all your bets on a single box, diversify your investments across multiple equity mutual funds as per your risk appetite to reduce your risk concentration risk. In case, one of your funds underperforms, the other funds in your portfolio might make up for it.
 
Don’ts
 
Compare NAVs to select funds
 
Fresh retail investors often believe that funds with lower NAVs are cheaper and thus, opt for such funds for SIPs. However, a fund’s NAV can be low or high due to numerous reasons. For instance, as the NAV of a fund would depend on the market price of its portfolio constituents, the NAV of a well-managed scheme would grow faster than other funds. Similarly, newer funds would have lower NAVs compared to older funds as the former receive a shorter time to grow. 
Hence, never consider the NAVs for comparing various mutual funds. Instead, you must consider the past performance of mutual funds and their future prospects of outperforming peer funds and benchmark indices as a selection parameter.
 
Stop SIPs during bearish market conditions
 
Many investors stop their SIPs during bearish market phases due to the fear of incurring more losses. However, doing so beats one of the crucial benefits of using SIP for investing in equity funds, i.e. rupee cost averaging by buying more units at lower NAVs during market dips and corrections. As quality equities are available at attractive valuations during steep market or bearish market situations, continuing with SIPs during such periods can reduce your investment cost and help you earn higher returns over the long term.
 
Investors with investible surpluses can further exploit bearish market conditions by topping up their SIPs with lump sum investments in a staggered manner as per their asset allocation strategy. This would further reduce their investment cost and can even help them to achieve their financial goals sooner.
 
Factor in the recent past performance for fund selection
 
Many SIP investors select funds on the basis of their recent performances, particularly returns generated during the past 1-year or 2-year period. However, such outperformances can be temporary due to various market related factors. Moreover, funds having an excellent track record in the past can underperform their benchmark indices and peer funds in the short term owing to the fund management style or prevalent market conditions. Hence, you should choose funds for SIPs after comparing their past performances with peer funds and benchmark indices for the past 5-year, and preferably for the past 10-year periods. Doing so will provide you a better idea about how the funds have performed over the entire economic cycle."

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)